The 1929 StockMarket Crash

On the surface, the 1920s appeared to be a very prosperous decade....an era of innovation, excitement and optimism. A closer look, however, reveals quite a different story.

Any summary of the stock market crash would be incomplete without mentioning the economic factors that preceded it. The two go hand-in-hand....some factors led directly to the crash, while others simply made it much worse than it should have been.

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economic factors outside the stock market

farmers
During World War I, farmers were getting high prices for their produce, thanks to a minimum price level set by the government. Farmers assumed that this boom would continue, and they mortgaged
and re-mortgaged their properties to buy modern equipment to increase production. Non-farmers jumped on the bandwagon and began to buy and operate farms, too. Sadly, most booms don't last, and this
was no exception. In the 1920s, overproduction caused demand and prices to fall, and farmers couldn't make their mortgage payments.

easy credit
The automobile industry introduced the practice of buying expensive items on installment plans, and credit was
being extended to just about everyone.

land speculation
During the 1920s, land booms in California and Florida brought builders and developers by the hundreds. Soon, the supply of homes far outnumbered the buyers, and the land booms
became a bust. These companies couldn't repay their loans and went bankrupt.

prohibition
Companies that depended on the liquor industry for their income suffered during the 1920s. Not only did this hurt taverns and breweries, but it also affected hotels, nightclubs, distilleries, bottle manufacturers and barley farmers.

overproduction
Workers were producing 43 percent more goods in the 1920s, but the average salary wasn't keeping pace. Because consumers couldn't afford the very products they were making, they bought less, and companies were overstocked.

banks suffer
What happens when farmers, land speculators, failing companies, and heavy borrowers can't repay their loans? This leaves banks with no funds for their own needs. Some banks failed, and others had to limit their activities drastically.

poor international trade
In response to our own high tariffs, foreign countries were charging high tariffs for American products sold abroad. In the 1920s, heavy borrowing by Americans and large loans
to other countries left banks without the funds needed to invest in overseas interests, and the foreign trade that America had always been so dependent on practically stopped.

unstable world economy
World War I had ruined the economies of many foreign countries, and they were still trying to recover during the 1920s.

In 1929, the amount of stock being bought and sold was higher than ever before, and stock prices kept going up. Some of the reasons for this include:

stock speculation
In the late 1920s, traders entered the speculation game as they recklessly invested money in stocks that appeared to
have a rosy future. Trading went through the roof, doubling between 1927 and 1928.

margin buying
Confident of a "sure thing," investors paid a small percentage of a stock price and the broker paid the rest. If
the stock did well enough, the investor could pay
back the broker and turn a nice profit.

stock manipulation
Eager to keep this trading boom going, investment trusts began to inflate prices by buying and selling stocks to themselves.

With so many investors buying high-priced stocks with money they didn't have, there was bound to be trouble. It was clear that the stock market couldn't maintain this frenzied pace. During 1928 and 1929, there were a few small indications that trouble might be brewing:

*in 1928, the market experienced a few sharp downturns, but quickly recovered*some banks were closing*large companies were running at a loss*investors who saw disaster in the future began to move their assets to bonds, cash and gold.